A Case Against U.S. Dollarization

Challenge, July, 2000 by George von Furstenberg

(2.) Budget of the U.S. Government Fiscal Year 2000, p.143: The spending proposed for international development and humanitarian assistance is $7.6 billion.

(3.) Mexico's monetary base, consisting almost entirely of peso currency, has been equal to about 3.5 percent of Mexico's GDP in recent years (Banco de Mexico 1999, p. 237). Adding U.S. dollar bills in Mexico would raise this percentage to around 5. At an interest rate of 5.5 percent otherwise earned on U.S. government securities, the annual cost of complete dollarization would be equal to 0.275 percent of Mexico's GDP. With that GDP estimated at $460 billion for 2000, the annual loss of seignorage would start at $1.25 billion. This figure could be expected to rise every year at the same rate as GDP so that the discounted present value of all the seignorage lost under just three decades of dollarization could easily be more than twenty times as large.

For Further Reading

Banco de Mexico. 1999. The Mexican Economy 1999.

Barro, R.J. 1999. "Let the Dollar Reign from Seattle to Santiago." Wall Street Journal, Midwest edition, March 8, p. A18.

Beddoes, Z.M. 1999. "From EMU to AMU?" Foreign Affairs (July/August): 8-13.

Buiter, W. 1997. "The Economic Case for Monetary Union in the European Union." Special Supplement, Review of International Economics 5, no. 4: 10-35.

Courchene, T.J., and R.G. Harris. 1999. "From Fixing to Monetary Union: Options for North American Currency Integration." C.D. Howe Institute Commentary 19, Toronto.

Frankel, J.A. 1999. "Dollarization: Fad or Future for Latin America?" IMF Economic Forum, Washington, DC (www.imf.org/extemal/np/tr/1999/TR990624.HTM).

Hausmann, R. 1999. "Exchange Rate Debate" and other short articles, Inter-American Development Bank, Latin American Economic Policies 7 (second quarter): 1-2, 6-8.

_____. 1999. "Should There Be Five Currencies or One Hundred and Five?" Foreign Policy 116 (fall): 65-79.

Holle, P. 1999. "Canadians Wonder Whether the Loonie Is for the Birds." Wall Street Journal, August 6, p. All.

Ize, A., and E. Levy-Yeyati. 1998. "Dollarization of Financial Intermediation: Causes and Policy Implications." International Monetary Fund Working Paper WP/ 98/28.

Laidler, D. 1999. "Canada's Exchange Rate Options." Canadian Public Policy 25, no. 3 (September): 324-32.

Mack, C. 1999. "Time to Reap the Dollar's Reward." Financial Times, December16, p. 15.

Meyer, L.H. 1999. "The Euro in the International Financial System." Federal Reserve Bank of Minneapolis, The Region 13, no.2 (June): 25-27,58.

Organization for Economic Cooperation and Development. 1999. EMU Facts, Challenges and Policies. Paris.

Ortiz, G. 1999. "Dollarization: Fad or Future for Latin America?" IMF Economic Forum, Washington, DC (www.imf.org/extemal/np/tr/1999/TR990624. HTM).

Sachs J., and F. Larrain. 1999. "Why Dollarization Is More Straitjacket Than Salvation." Foreign Policy 116 (fall): 80-92.

Stein, E. 1999. "Financial Systems and Exchange Rates: Losing Interest in Flexibility." Inter-American Development Bank, Latin American Economic Policies 7 (second quarter): 2, 8.